Cost Volume Profit Analysis

Transcription

1 Cost Volume Profit Analysis

2 Definition Cost-Volume-Profit is used in managerial accounting in order to determine the effect changes in the cost and volume of sales has on the profit that can be generated by the company. It indicates how the profit is affected by changes in fixed costs, variable costs, selling price per unit, sales mix of two or more products etc. Cost-Volume-Profit makes several assumptions inclusive of the following: 1) All costs can be categorised as fixed or variable 2) Total fixed costs, variable cost per unit and selling price per unit are constant 3) All units produced are sold

3 Effects of changes on cost Fixed Costs Semi-Variable Costs Variable Costs Step Costs

4 Contribution margin When using CVP Analysis, the key calculations are those for the contribution margin and contribution margin ratio. The contribution margin indicates the amount of profit made by a company before the deduction of fixed costs. It is calculated by deducting all variable costs from the revenue. The contribution margin ratio is calculated by dividing the contribution margin by the revenue amount. It is the percentage of the revenue that is available for the coverage of fixed costs.

5 FFAS Inc. sells 250,000 units during the year The sales price pet unit is $3 and the total variable cost per unit is $1.80. FFAS Inc. has total sales of RM750,000 and total variable costs of $450,000. Therefore, its contribution margin will be $300,000. The contribution margin per unit will be $1.20. The contribution margin ration will be 40%.

6 Break-even point The break-even point is the point at which the level of sales must be in order for the total revenue earned to be equal to the total costs incurred. There is neither profit nor loss. The contribution margin is equal to the fixed costs.

7 Break-Even Analysis: Formula (Sales) Break-Even Analysis: Formula (Quantity) Break-Even Analysis: Graph

8 EXAMPLES

9 Example (Question A) ABC Sdn Bhd has drawn up the following budget for its next financial period: Selling price per unit RM11.60 Variable production cost per unit RM3.40 Sales commission 5% of selling price Fixed production costs RM430,500 Fixed selling and administration costs RM198,150 Sales units

10 A. i) Calculate the margin of safety and how much does it represented to the budgeted sales Safety Margin Budgeted Sales or Total Sales Breakeven Sales Break-even Point (units) Total Fixed cost/contribution Margin per unit Break-even Point (sales value, RM) Total Fixed cost/contribution Margin Ratio Contribution Margin per unit Selling Price per unit - Variable Cost per unit Contribution Margin Ratio Contribution Margin per unit - Selling Price per unit Solution: Contribution Margin per unit RM RM (5% x RM11.60) RM7.62 Break-even point (units) (RM430,500 + RM198,150) / RM ,500 Break-even point (sales value, RM) 82,500 x RM11.60 RM957,000 Budgeted sales 90,000 x RM11.60 RM1,044,000 Safety Margin (RM) RM1,044,000 - RM957,000 RM87,000 Safety Margin (%) RM87,000 / RM1,044, %

11 A. ii) The marketing manager has indicated that an increase in the selling price to RM12.25 per unit would not affect the number of units sold, provided that the sales commission is increased to 8 percent of the selling price. Calculate the present break-even point and break-even point after the changes in selling price and sales commission effected. Break-even Point (units) Total Fixed cost/contribution Margin per unit Break-even Point (sales value, RM) Total Fixed cost/contribution Margin Ratio Solution: Contribution Margin per unit RM RM (8% x RM12.25) RM7.87 Break-even point (units) (RM430,500 + RM198,150) / RM ,879 Break-even point (sales value, RM) x RM12.25 RM978,518

12 CVP Graph or BE Analysis Chart

13 Question [B](i) [B]. Profit statements for August and September are as follows: i) Draw a contribution break-even chart and identify the monthly break even sales value and area of contribution. August September (RM) (RM) Sales 80,000 90,000 Cost of Sales 50,000 55,000 Gross Profit 30,000 35,000 8,000 9,000 15,000 15,000 7,000 11,000 Less: Selling and Distribution Administration Net Profit

14 SOLUTION for [B](i) 1.Find your own Variable and Fixed Cost. (i)variable Cost Cost that varies when you produce something

15 Variable Attributes August September Change Sales 80,000 90,000 10,000 Cost of Sales 50,000 55,000 5,000 (5,000/10,000) X % Selling and Distribution 8,000 9,000 1,000 (1,000/10,000) X % Administration 15,000 15, TOTAL variable %: 60% of Sales

16 (ii)fixed Cost Total Cost Variable Cost Total Cost Variable Cost (% of the Sales) Fixed Cost Cost of Sales 50,000 (50% X 80,000) 40,000 10,000 Selling and Distribution 8,000 (10% X 80,000) 8,000 0 Administration 15,000 (0% X 15,000) 0 15,000 TOTAL FIXED COST: 25,000 Haiii abidahh

17 (iii)total Cost Fixed Cost (25,000) + Variable Cost (60% of sales in August) (iv)make a chart to plot a Break-Even Analysis graph using the formula above. Sales Variable Cost Total Cost (F + V) (RM) (60% of Sales) (RM) (RM) ,000 50,000 30,000 55,000 80,000 48,000 73,000 90,000 54,000 79, ,000 60,000 85,000

18 (iv)find the Break-Even Sales BE Fixed Cost/ Contribution Margin Ratio Contribution Margin Fixed Cost / Contribution Margin OR: (Sales 100%, Variable Cost 60% of the Sales, therefore CM ratio 40%) Thus, BE (25,000/ 40%) RM 62,500

19 (i) Plot the graph.

20 Question [B](ii) ii)assuming a margin of safety equal to 30 per cent of the break-even value, calculate ABC Sdn Bhd annual profit.

21 SOLUTION for [B](ii) 1. Break-even Value (RM) RM62, Marginal value 30% of breakeven value 3. Therefore, 130% X 62,500 RM 81, PROFIT REVENUE COST Profit (contribution margin)-(fixed cost)

22 5.. Contribution Margin(sales) 40% per sale (since 60% of the sale is Variable Cost) Thus, 40% X 81,250 RM32, Fixed Cost 25, Profit (monthly) CM FC (32,500)- (25,000) RM 7, Profit (annually) RM7,500 X 12 months RM 90,000

23 Question [B](iii) iii) ABC Sdn Bhd is now considering opening another outlet selling the same products. ABC Sdn Bhd plan to have same profit margin for both outlets and has estimated that the fixed costs of the second outlet will be RM 100,000 per annum. Calculate the annual value of sales required from the new outlet in order to achieve the same annual profit as previously obtained from the single outlet.

24 SOLUTION for [B](iii) 1.Find the Contribution margin from Outlet B (i)outlet A has contributed a profit of RM 32,500 (monthly). So the contributed profit from Outlet A annually is RM 390,000. (ii)the Cost of Selling and Distribution will be 10% of the Contributed annually profit of Outlet A, 10% X 390,000 RM39,000

25 (iii) There is an additional fixed cost in opening Outlet B,which is RM 100,000. (iv) Thus, the Total Contribution Margin of Outlet B will be RM 390,000 + RM 39,000 + RM 100,000 RM 529,000 2.Find the Break-Even Sales Value of Outlet B BE Sales Value Fixed Cost / Contribution Margin Ration RM529,000 / 40% RM 132,250

26 Thank you!